Book Review: The Power of Passive Investing

Last Updated Jan 18, 2011 3:53 PM EST

As I've pointed out in my books, columns and blog posts, investing is a serious business. It's about giving you the best chance of achieving your life and financial goals with the least amount of risk. It was never meant to be entertaining. That message comes through loud and clear in Rick Ferri's new book The Power of Passive Investing.

This well-crafted book presents the historical background on index funds and then presents an excellent summary of the evidence from a wide variety of academic papers on the quest for alpha by mutual funds and investors in mutual funds. The book clearly presents the case that there's an overwhelming body of evidence demonstrating that trying to outperform the market is a loser's game.

Through the presentation of historical evidence, Ferri demonstrates that while it's possible to beat the market (and some do), the odds of doing so are so poor that it's not in your best interests to try. The evidence presented shows clear clearly that not only are there far more losers than winners, but once you adjust the odds for risk (the negative alphas of the underperforming funds are much larger than the positive alphas of the outperformers), the odds of a portfolio of active funds outperforming a portfolio of passive funds asymptotically approaches zero. This is especially true since there's no evidence of persistence in performance beyond the randomly expected.

The second half of the book presents the compelling logic of why adopting a passive investment strategy is the prudent decision for not only individual investors, but also for charities, trusts, endowments, pension funds and even financial advisors.

I recommend this book to all serious investors. Of course, that should be the only kind of investor.

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    Larry Swedroe is director of research for The BAM Alliance. He has authored or co-authored 13 books, including his most recent, Think, Act, and Invest Like Warren Buffett. His opinions and comments expressed on this site are his own and may not accurately reflect those of the firm.